Making Sense of ESG Bond Structures

Investors are eager to buy green bonds. But to make the right choices, they need to analyze not only the financials, but also the governing framework of a given bond and its fit with the overall sustainability of the issuing company.

We’re optimistic about the potential for environmental, social and governance (ESG)-linked bonds to help create a better, more sustainable world. But with the recent proliferation in different types of green bond issues, investors need to understand their differences (Display).

A table describes the four main types of ESG-linked bond structures and compares them across various features.

Green bonds are use-of-proceeds structures that began as a straightforward concept—bonds that were issued for a specific project or projects with an environmentally beneficial purpose. Since then, companies have issued new types of bonds to finance a range of green, social and sustainable projects.

The most recent innovation—the KPI-linked bond—incentivizes the issuing company to achieve higher ESG standards across the business, rather than to finance a specific project. Such initiatives give issuers considerable flexibility in raising capital on ESG-linked grounds.

The proliferation of ESG-linked bonds means investors need to be aware of the technical distinctions and to understand the investment implications of each ESG-linked class.